Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a commission of 15% of selling price for all items sold.

Karen, Pittman’s controller just prepared the company’s budgeted income statement for next year. The statement follows:

PITTMAN COMPANY

BUDGETED INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

SALES

$16,000,000

MANUFACTURING COSTS:

 VARIABLE

$7,200,000

 FIXED

 2,340,000

 9,540,000

GROSS MARGIN

 6,460,000

SELLING & ADMIN COSTS:

 COMMISSION TO AGENTS

2,400,000

 FIXED MARKETING COSTS

  120,000*

 FIXED ADMIN COSTS

1,800,000

 4,320,000

NET OPERATING INCOME

 2,140,000

  *All depreciation on storage facilities.

As Karen handed the statement to Mitt Romney, Pittman’s president, she commented, “ I used the agents’ 15% commission rate in completing the statement. But we’ve just learned that the agents refuse to handle selling our product next year unless we increase the commission rate to 20%."

Mitt replied “How can they possibly defend a 20% commission rate? And I say it’s time we fire those guys and get our own sales force.”

Karen said “We can hire our own sales staff and pay them 7.5% commission, along with a small salary. Of course, we would have to handle all promotion costs too. We figure our fixed costs would increase by $2,500,000 per year.”

The breakdown of the $2,500,000 cost figure is as follows:

           Salaries:

                       Sales manager                       $  100,000

                       Salespersons                             700,000

           Travel and Entertainment                      400,000

          Advertising                                          1,300,000

                       Total                                       $2,500,000

Required:

Compute Pittman’s break-even point in sales dollars for next year assuming:

a.    that the agents commission rate remains unchanged at 15%

b.    that the agents commission rate is increased to 20%

c.    that the company employs its own sales force

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Status NEW Posted 20 Jun 2017 03:06 AM My Price 9.00

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